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Federal Reserve Bank of San Francisco
Working Papers in Applied Economic Theory
Financial implications of regional trade accords
Eduardo Fernandez-Arias
Mark M. Spiegel
Abstract

We examine the implications of a North-South trade accord where investments in the Southern partner nation exhibit country risk. Our analysis demonstrates that North-South trade accords can serve as "credibility-enhancing" mechanisms towards treatment of foreign investment, inducing additional foreign capital inflows. We then examine the issues of trade and financial creation and diversion under the accord. The presence of sovereign risk changes the tradeoffs between trade creation and diversion, enhancing the potential for welfare-increasing trade-diverting regional trade accords.


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Eduardo Fernandez-Arias & Mark M. Spiegel, Financial implications of regional trade accords, Federal Reserve Bank of San Francisco, Working Papers in Applied Economic Theory 95-01, 1995.
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Keywords: International trade ; Free trade ; North American Free Trade Agreement
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